We are consulting on proposals to reduce the potential for harm to retail investors in funds that hold illiquid assets, particularly under stressed market conditions. These measures will also support our market integrity objective and help address financial stability concerns.

Open-ended funds that invest in illiquid assets can encounter difficulties if many investors simultaneously try to withdraw their money at short notice. This happened following the result of the UK referendum on EU membership in June 2016, when a number of property funds had to suspend dealing temporarily.

We consider that suspensions and other liquidity management tools worked as they were intended to, and helped to prevent wider market disruption. The results of supervisory work carried out following the property fund suspensions and feedback to our Discussion Paper 17/1 confirmed that a major overhaul of the regulatory framework in this area was not needed. However, we consider that improvements should be made in the use of suspensions and other liquidity management tools, contingency planning, oversight arrangements and disclosure to retail clients.

Who this applies to

Those with an interest in open-ended funds, in particular non-UCITS retail schemes (NURSs), that invest in illiquid assets, such as property, should read this paper. This includes fund managers, depositaries, ancillary service providers, intermediaries and investors. The proposals also have implications for those communicating financial promotions of funds investing mainly in illiquid assets to retail clients.

Summary of our proposals

We are consulting on a package of measures that will require:

funds to suspend trading when the independent valuer expresses uncertainty about the value of ’immovables’, such as commercial property, that account for a significant part of the fund’s assets

managers of funds investing mainly in inherently illiquid assets to produce contingency plans in case of a liquidity risk crystallising

depositaries to oversee the liquidity management process in these funds.

more information to be disclosed about the liquidity risks in these funds, the liquidity management tools available to the fund manager, the circumstances in which they may be used and what impact they may have on investors

If successful, these measures should:

help retail investors understand better any restrictions on access to their investments and the circumstances in which these restrictions will be placed on the funds

in the case of funds investing in immovables, reduce the potential for some investors to gain at the expense of others because units have been incorrectly priced, due to uncertainty about the value of assets held in the fund

reduce the likelihood of a run, which could substantially reduce the value of investments for those left in the fund and possibly destabilise the market more widely

Next steps

We will consider your feedback and expect to publish our final rules and guidance in a policy statement later in 2019.